23 October 2020

FT: EU explores tougher curbs on City hedge fund managers

Brussels is exploring whether to restrict the possibility for hedge funds to be managed from overseas financial centres such as the City of London, reviving an idea that UK asset managers see as an existential threat. The European Commission included questions on a possible tightening of the rules governing hedge funds in a consultation paper published on Thursday, picking up on suggestions earlier this year from the bloc’s top market regulator that “delegation” of fund management should be more clearly limited in response to Brexit.

A practice at the heart of global investment management, delegation allows managers to base and sell funds in the EU, while outsourcing investment decisions to financial centres such as the UK, which will become a so-called third country at the end of the Brexit transition period. Existing EU rules say that delegation should be for clear business reasons and not undermine the effectiveness of supervision by national regulators, but do not set prescriptive limits.

The consultation document asks if the bloc should go further, for example by setting “quantitative” limits on delegation or establishing a list of “core or critical functions” that should be performed in the EU. “What is concerning is that the EU is using Brexit as an excuse for changing international norms,” said one UK fund management executive. The person added that the push to tighten the delegation rules was a politically motivated manoeuvre aimed at forcing investment groups to shift portfolio manager jobs — the sector’s most “high-profile, profitable functions” — to continental Europe. The commission document also asks whether action is needed to clamp down on “letterbox entities” — shell companies that take orders from foreign delegates — and whether different rules are needed depending on delegates’ location in order to safeguard investor protection.

While Brussels insists it is not prejudging the conclusions of the review, the idea of restricting delegation fits with broader themes of onshoring and centralising oversight that have come to the fore in EU financial services policy since the 2016 Brexit vote. As the EU has grappled with the implications of the City leaving the bloc’s regulatory purview, Brussels has toughened its assessments of whether non-EU financial services firms should be granted key market access rights. The EU has also legislated to allow it to force critical market infrastructure to move into the bloc to serve European customers....

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